Snap’s Redesign Already Has Competition

The competition for Snap Inc. (SNAP) is getting more intense as tech and social media giants switch gears to divide the personal and advertised content and take stringent steps to address the issue of ‘fake news’.

Snap’s Story so far….

For starters, Snap went public in 2017 and was considered to be the second largest tech stock IPO, behind only to Facebook (FB).

Launched as a ‘camera company’, it faced stiff competition from established tech and social media giants like Google (GOOGL), Twitter (TWTR), and Facebook. Soon after its IPO, Snap’s stock price tumbled, falling below its IPO price of $17 per share and comparisons were made whether Snap will go the Facebook way or the Twitter way. But Snap has struggled to find its identity amidst growing competition.

To be fair, Snap pioneered and popularized ephemeral stories feature but the non-exclusivity clearly gave way to duplication.

Rival companies like Facebook’s Instagram blatantly (and unapologetically) copied Snap’s features and the latter did little to address the elephant in the room.

On being asked about Instagram’s Parent company Facebook, Snap CEO Evan Spiegel had said: “If you want to be a creative company, you have to be comfortable with the fact that people will copy your stuff. Everyone will develop a camera strategy. Just because Yahoo has a search box, it doesn’t mean they’re Google.”

Only after Facebook aggressively started integrating its platforms (Instagram, WhatsApp, Messenger), did it become evident to Snap that it was on the losing end.

In Q2, Snap added 7.3 million daily active users with a 4.2 percent growth rate reaching 173 million. The user growth was slower than its first quarter which recorded 166 million DAU.

In Q3, with only 4.5 million new users, Snap failed to generate and draw a huge audience through its features. As reported in Q3, its daily active users were 178 million, a number which appears smaller in comparison to the current 800 million users on Instagram.

Now after close to a year of its market debut, Snap is yet to convince its investors that it could be a lucrative investment.

The Redesign

Snap has attempted to uplift its revenues by trying to tap a larger demographic beyond millennials, by redesigning its user interface.

After reporting a net loss of $443 million in its 3Q17 earnings, the company aimed to simplify the app for its users, unveiling its fresh design in 2017.

Snap’s CEO Evan Spiegel explained the latest version of Snap which separated the ‘social’ from the ‘media’, in other words dividing Stories from Discover.In an Axios op-ed, Spiegel wrote, “We are separating the social from the media, and taking an important step forward towards strengthening our relationships with our friends and our relationships with the media.” As a part of the redesign, Snap recently allowed Snap users to share stories on platforms like Facebook and Twitter through text or email.

But interestingly, Snap is not the only one redesigning. Rivals like Facebook and Twitter are looking for ways to simplify and encourage content that the users would like to see more often.

Snap’s redesign model comes a few months before its biggest rival, Facebook made similar changes.

Facebook will show news feed based on three parameters — who posted it, type of content and the user’s interaction with it. Following the new algorithm shift, Facebook shares tumbled 4% since many investors felt that the change could bring bad news impacting publisher’s traffic.

The changes to its News Feed already led to a total of approximately 50 million fewer hours spent on Facebook every day. In the long term, this could mean that publishers and businesses may look at alternative avenues to promote their content and the shift could affect Facebook’s ad earnings in the future.

But Facebook seems confident in the long run.

In its fourth quarterly earnings release, the company reinstated that it will be ‘encouraging meaningful connections between people rather than passive consumption of content’. Its intention to encourage ‘meaningful connections stems from the fact that it wants to create a stronger community and business over the long term.

While Facebook’s intent appears promising, the real number is yet to be seen in its upcoming earnings this year.

For Snap, Facebook may not be the only inevitable competition.

Twitter is also reportedly working on a video sharing, which may have Snap like features. In an interview with Recode, Twitter’s CEO Jack Dorsey acknowledged that Twitter’s current experience as ‘confusing’ and praised Snap for being ‘very modern’. So there are changes that Twitter would want to have.

In an attempt to make Twitter more appealing to the users, Twitter may be following the route of Facebook and Snap. Bloomberg reported that according to the people close to the matter Twitter already has a working demo of the camera-centered product.

Following the report, Snap shares tumbled more than 5%, touching $13.72.

Redesign faces Backlash — Snap introduced the changes to simplify its existing design. But this could make it harder for small advertisers to create lasting impressions about their product. With strong rivals on the same path, advertisers will most likely look for cheaper but innovative options to promote their content. In other words, ad pricing may become crucial as platforms like Snap, Twitter, and Facebook try to be at par ( relentlessly copying one another’s features).

Snap has aware of the teething stages of the redesign.

In its 3Q17 earnings call, Spiegel said, “There is a strong likelihood that the redesign of our application will be disruptive to our business in the short term, and we don’t yet know how the behavior of our community will change when they begin to use our updated application. We’re willing to take that risk for what we believe are substantial long-term benefits to our business.”

So far the camera company’s redesign is available only in a few countries, including the U.K, Canada, and Australia. But already the feedback on the redesign is not too reassuring.

TechCrunch reported that Snap’s redesign in the beta countries was being bashed by the users. Snap maintained, “Updates as big as this one can take a little getting use to, but we hope the community will enjoy it once they settle in.”

But while Snap awaits the repercussions of its redesign, it faces other challenges that could shake investors’ confidence.

Layoffs and Departure — Snap’s redesign means that the algorithm shift would give way to its Discover content undergoing human editorial review. But the recent news on the company’s layoffs may not be very comforting. Recently, close to two dozen Snap employees were laid off in New York and London. Last year, Snap laid off many employees in consecutive rounds and Snap’s CEO Evan Spiegel announced that in 2018, it will slow down its hiring efforts.

The most recent piece of news is the departure of Snapchat’s VP of Product, Tom Conrad. Conrad joined Snap some two years back and his announcement to leave comes at a critical point when Snap is amidst its redesigning phase.

Losses from Spectacles — In the past, Snap has heavily promoted Spectacles, which is the closest traditional hardware camera product it has showcased. The hyped technology allows a pair of glasses to record and share videos on Snapchat.

But the product has failed to resonate with the interests of many millennial — Snap’s largest demographic. Additionally, the company sits on “hundreds of thousands” of unsold glasses. In its third quarterly report, Snap has recorded a loss of $39.9 million, related to Spectacles inventory.

Recently, Time reported that a British surgeon explained how Snap Spectacles, (which can capture high-resolution images in real time) was transforming the way doctors get trained in operating rooms. But such use may do little to boost the demand for Snap’s Spectacles.

High Hosting Costs –With nearly a year in as a public company, hosting costs remains a growing concern for Snap.

Snap depends on Google cloud for the vast majority of its computing, storage, bandwidth, and other services, with a spending of $2 billion spread across five years, In Q3 of 2017, Snap disclosed that its hosting costs per DAU were $0.68 this quarter, compared to $0.64 in the third quarter a year ago.

Additionally, Snap uses Amazon Web Services which comes at a cost of $1 billion spread across a five-year deal.

In its updated S-1 filing with the Securities and Exchange Commission, the firm mentions, “Hosting costs will also increase as our user base and user engagement grows and may seriously harm our business if we are unable to grow our revenues faster than the cost of utilizing the services of Google or similar providers.”

BottomLine

So far, Snap’s future and an investment in it looks uncertain. In the short run, Snap faces a bumpy ride as the company gets deeply scrutinized by media houses and analysts as it tries to tap a wider demographic. In the long run, it’s redesign already faces stiff competition (again!) from companies like Facebook and Twitter — For investors — that wait may be too long!